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FCC Rules VoIP Must Pay into Universal Service Fund

Operating with a Republican majority for the first time in over a year, the Federal Communications Commission on Wednesday ruled that voice over Internet Protocol (VoIP) providers, like cellular operators, must pay into the Universal Service Fund (USF), a fund that subsidizes providers in rural and lower-income areas to ensure accessibility at reasonable rates.

In a two-part order, the FCC (News - Alert) ruled that a portion of any interconnected VoIP provider’s revenue will be determined to be interstate traffic and subject to the tax rate outlined by USF. That percentage, known as the “safe harbor” percentage, was arbitrarily set at 64.9 percent. The second part of today’s order raised the existing wireless safe harbor percentage from 28.5 percent to 37.1 percent of total revenue – the first update since 2002.

“We’re going to send out notices on July 1,” said Bryan Martin, CEO at 8x8, which owns and operates the Packet8 VoIP service. Packet8 will pass along the additional cost to its customers, Martin told TMCnet.

However, due to the recent elimination of the Federal Excise Tax (FET) on long distance service, the overall impact on the VoIP industry will be neutral and negligible, according to Vonage (News - Alert) spokeswoman Brooke Schulz.

“So it's kind of a wash. If there is an increase, it will be slight for our customers,” Schulz emphasized during a telephone interview.

Interconnected VoIP providers have the option to base their USF contributions either on their actual revenues or on traffic studies that estimate interstate revenues, as wireless carriers have had for some time. And Packet8’s Martin (who is in
Washington testifying before Congress) plans to meet with FCC staffers later this week to clarify (among other things) how to reassess the safe harbor percentage.

“If you want to do your own traffic studies, then you can do that. Ours are much lower,” Martin explained. Based on internal studies, the 8x8 official said he believes a majority of his customers actually originate intrastate calls and only 46 percent of Packet8’s total traffic is interstate.

But in his statement, FCC Chairman Kevin Martin believes the 65 percent threshold is fair given the fact that “many of these VoIP providers claim that their
services are ‘inherently interstate.’”

“Thus, we could require these providers to pay based on 100 percent of their revenues,” the FCC’s Martin said.

Packet8’s Martin also objected to the fact that withdrawals of the USF funds are rarely earmarked for IP-based communications. Indeed, the proposed telecom reform bill that is currently in the Senate calls for the establishment of a separate account known as the “Broadband for Unserved Areas Account” to be earmarked for IP-based initiatives.

“I've been saying for two years that I would support paying into it if the fund was used to deploy Voice over IP technologies. If you have a universal service fund to support lower income areas, don't give them a copper wire,” Martin said. Based on his own observations, the Packet8 officials said he believes the bill has a 50-50 chance of clearing the Senate before the current Congressional session expires.

To be sure, Chairman Martin emphasized that today’s actions are only an interim step toward overhauling telecom regulations. “I still believe that this system needs fundamental reform, and I remain committed to adopting and implementing a numbers-based contribution system.Accordingly, our work in this area is far from complete.I look forward to working with my colleagues to preserve the values of universal service,” he said.

His position was applauded by the National Cable & Telecommunications Association (NCTA (News - Alert)), a group representing cable operators.

“We have long advocated that providers of IP voice service make contributions to support the Universal Service Fund and cable companies do so today for both their traditional circuit-switched and IP voice
services . Today's decision codifies this longstanding practice. We appreciate the flexibility the Commission has provided for companies to conduct traffic studies to determine the amount of their revenues subject to USF assessment, and are pleased that the Commission started a rulemaking proceeding to further examine these issues. We recognize that today's action is an interim step and look forward to the adoption of a long-term numbers-based contribution mechanism for USF,” the NCTA’s SVP for Law & Regulatory Policy Daniel Brenner said.

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Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.